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CONTENT
Sr. No. PARTICULARS Page No.
INTRODUCTION
1 Cost Accounting Vs. Financial Accounting 2
2 Cost Accounting Standards 2
COST ACCOUNTING STANDARDS
1 CAS 1 Classification of Cost 5
2 CAS 3 Overheads 11
3 CAS 6 Material Cost 15
4 CAS 7 Employee Cost 19
5 CAS 10 Direct Expenses 23
6 CAS 11 Administrative Overheads 26
7 CAS 14 Pollution Control 29
8 CAS 18 Research and Development 32
9 CAS 19 Joint Cost 34
10 CAS 21 Quality Control 37
CONCLUSION 40
BIBLIOGRAPHY
2
Introduction:
Cost accounting is a process of collecting, analyzing, summarizing and evaluating various
alternative courses of action. Its goal is to advise the management on the most appropriate course
of action based on the cost efficiency and capability. Cost accounting provides the detailed cost
information that management needs to control current operations and plan for the future.
Since managers are making decisions only for their own organization, there is no need for the
information to be comparable to similar information from other organizations. Instead,
information must be relevant for a particular environment. Cost accounting information is
commonly used in financial accounting information, but its primary function is for use by
managers to facilitate making decisions.
Unlike the accounting systems that help in the preparation of financial reports periodically, the
cost accounting systems and reports are not subject to rules and standards like the Generally
Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems
of the different companies and sometimes even in different parts of the same company or
organization.
All types of businesses, whether service, manufacturing or trading, require cost accounting to
track their activities. Cost accounting has long been used to help managers understand the costs
of running a business. Modern cost accounting originated during the industrial revolution, when
the complexities of running a large scale business led to the development of systems for
recording and tracking costs to help business owners and managers make decisions.
In the early industrial age, most of the costs incurred by a business were what modern
accountants call "variable costs" because they varied directly with the amount of production.
Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to
production. Managers could simply total the variable costs for a product and use this as a rough
guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike variable costs, which rise
and fall with volume of work. Over time, these "fixed costs" have become more important to
managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost
of departments such as maintenance, tooling, production control, purchasing, quality control,
storage and handling, plant supervision and engineering. In the early nineteenth century, these
costs were of little importance to most businesses. However, with the growth of railroads, steel
and large scale manufacturing, by the late nineteenth century these costs were often more
important than the variable cost of a product, and allocating them to a broad range of products
lead to bad decision making. Managers must understand fixed costs in order to make decisions
about products and pricing.
3
COST ACCOUNTING VS FINANCIAL ACCOUNTING:
 Financial accounting aims at finding out results of accounting year in the form of Profit
and Loss Account and Balance Sheet. Cost Accounting aims at computing cost of
production/service in a scientific manner and facilitates cost control and cost reduction.
 Financial accounting reports the results and position of business to government, creditors,
investors, and external parties.
 Cost Accounting is an internal reporting system for an organization’s own management
for decision making.
 In financial accounting, cost classification based on type of transactions, e.g. salaries,
repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of
functions, activities, products, process and on internal planning and control and
information needs of the organization.
 Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and
loss for a period and Statement of financial position (Balance Sheet) on a given date. It
aims at computing ‘true and fair’ view of the cost of production/services offered by the
firm.
COST ACCOUNTING STANDARDS:
The Institute of Cost Accountants of India (ICAI), recognizing the need for structured approach
to the measurement of cost in manufacture or service sector and to provide guidance to the user
organizations, government bodies, regulators, research agencies and academic institutions to
achieve uniformity and consistency in classification, measurement and assignment of cost to
product and services, has constituted Cost Accounting Standards Board (CASB) in the year 2001
with the objective of formulating the Cost Accounting Standards (CASs).
The structure of Cost Accounting Standard consists of Introduction, Objectives of issuing
standards, Scope of standard, Definitions and explanations of the terms used in the standard,
Principles of Measurement, Assignment of Cost, Presentation and Disclosure.
The CASB has primarily identified 39 areas/items on which CASs are to be developed.
The Council of the ICAI at its 251th Meeting held on 12–13 February 2009 and 258th Meeting
held on 14 December 2009 decided on Mandatory application of Cost Accounting Standards
(CASs). The CASs shall be mandatory with effect from period commencing on or after 1 April
2010 for being applied for the preparation and certification of General Purpose Cost Accounting
Statements. So far ever 17 Cost Accounting Standards have been issued by the Institute.
4
List of CASs issued by ICAI till date are as follows:
CAS-1 on Classification of Cost
CAS-2 (Revised 2012) on Capacity Determination
CAS-3 (Revised 2011) on Overheads
CAS-4 on Cost of Production for Captive Consumption
CAS-5 on Average (equalized) Cost of Transportation
CAS-6 on Material Cost
CAS-7 on Employee Cost
CAS-8 on Cost of Utilities
CAS-9 on Packing Material Cost
CAS-10 on Direct Expenses
CAS-11 on Administrative Overheads
CAS-12 on Repairs and Maintenance Cost
CAS-13 on Cost of Service Cost Centre
CAS-14 on Pollution Control Cost
CAS-15 on Selling & Distribution Overhead
CAS-16 on Depreciation & Amortisation
CAS-17 on Interest and Financing Charges
CAS-18 on Research & Development Expenses
CAS-19 on Joint Costs
CAS-20 on Royalty and Technical Know-How Fee
CAS-21 on Quality Control
5
CAS-1: CLASSIFICATION OF COST.
INTRODUCTION:
The standard on classification of costs deals with the basis of classification of costs and the
practice to be adopted for classification of cost elements in regards to its nature and management
objective. The statement aims at providing better understanding on classification of cost for
preparation of various cost statements required for statutory obligations or cost control measures.
OBJECTIVE:
1. The objective of this Standard is to prescribe the classification of costs for ascertainment of
cost of a product or service and preparation of cost statements on a consistent and uniform basis
with a view of effect the comparability of the same of an enterprise with that of previous period
and of other enterprises.
2. The classification and its disclosure are aimed at providing better transparency in the cost
statement.
3. The standard is also for better adoption of uniform Costing and Inter-firm Comparison.
SCOPE:
1 The standard on Classification of cost should be applied in assessment of cost of a product or
service, application of costing technique and in case of management decision making by the
manufacturing industries in India.
2. The standard has also to be followed for the purpose of assessment of cost of production or
valuation of stock to be certified for calculation of duties and taxes. Tariffs and other purpose as
the case may be. The cost statement prepared based on standard will be used for assessment of
excise duty and other taxes, antidumping measures, transfers pricing etc.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Cost: Cost is measurement, in monetary terms, of the amount of resources used for the
purpose of production of goods or rendering services.
2. Cost Centre: Any unit of Cost Accounting selected with a view to accumulating all cost
under that unit. The unit may be a product, a service, division, department, section, a
group of plant and machinery, a group of employees or a combination of several units.
This may also be a budget centre.
3. Cost Unit: Cost unit is a form of measurement of volume of production or service. This
unit is generally adopted on the basis of convenience and practice in the industry
concerned.
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CLASSIFICATION OF COST:
Classification of cost is the process of grouping the components of cost under a common
designation on the basis of similarities of nature. It is the process of identification of each item
together according to their common features. Items grouped together under common heads may
be further classified according to their fundamental differences. The same costs may appear in
several different classifications depending on the purpose of classification.
Cost is classified normally in terms of a managerial objective. Its presentation normally requires
sub-classification. Such sub-classification may be according to nature of the cost elements.
Functional lines, areas of responsibility or some other useful break-up. The appropriate sub-
classification depends upon the uses to be made of the cost report.
Basis of Classification:
i. By Nature Of Expenses:
Cost should be gathered together in their natural groupings such as materials, labour and other
expenses. Items of costs differ on the basis of their nature. The elements of cost can be classified
in the following three categories: i) Material ii) Labour iii) Expenses
COST
MATERIAL LABOUR EXPENSES
ii. By Relation Of Cost Center:
Classification should be on the basis of method of allocation of cost to a cost unit. If expenditure
can be allocated to a cost centre or cost object in an economically feasible way then it is called
direct otherwise the cost component will be termed as indirect. According to this material cost is
divided into direct material cost and indirect material cost, labour cost into direct labour cost and
indirect labour cost and expenses into direct expenses and indirect expenses. Indirect costs are
also known as “Overheads”.
COST
DIRECT INDIRECT
MATERIAL LABOUR EXPENSES
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iii.By Functions/Activities:
Costs should be classified according to the major function for which the elements are used into
the following four major functions:
 Production;
 Administration;
 Research and Development;
 Selling and Distribution.
COST
PRODUCTION ADMINISTRATION RESEARCH & DEVELOPMENT
SELLING & DISTRIBUTION
iv. By Behaviour:
COST
FIXED VARIABLE SEMI-VARIABLE
Costs are classified based on behaviour as fixed cost, variable cost and semi-variable cost
depending upon response to the changes in the activity levels.
v. For Management Decision Making:
Costs are classified for the purpose of management decision making under different
circumstances as under:
 Marginal Cost
 Differential Cost
 Opportunity Cost
 Replacement Cost
 Relevant Cost
 Imputed Cost
 Sunk Cost
 Normal Cost
 Abnormal Cost
 Avoidable Cost
 Unavoidable Cost
8
COST
MANAGERIAL
DIFFERENTIAL
OPPORTUNITY
REPLACEMENT
RELEVENT
IMPUTEDSUNK
NORMAL
ABNORMAL
AVOIDABLE
UNAVOIDABLE
9
vi. By Nature Of Production Process:
Costs are also classified on the basis of nature of production or manufacturing process. Cost can
be classified as follows:
 Batch Cost
 Process Cost
 Operating Cost
 Contract Cost
 Joint Cost
 By-Product Cost
COSTBATCH
PROCESS
OPERATING CONTRACT
JOINT
BY-
PRODUCT
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vii. Classification By Time:
Cost item is related to a specific period of time and cost can be classified according to the system
of assessment and specific purpose as indicate in the following ways:
 Historical Cost
 Pre-Determined Cost
 Standard Cost
 Estimated Cost
COST
HISTORICAL PRE-DETERMINED STANDARD ESTIMATED
PRESENTATION AND DISCLOSURE:
The classification of cost item should be done on ‘basis of classification’ chosen with pre-
determined objective.
The classification of cost item should be followed consistently from period to period and
preparation of cost statements should be made with reference to a period time.
A change in classification should be made only if it required by law or for compliance with a
Cost Accounting Standard or the change would reset in a more appropriate preparation or
presentation of cost statements of an enterprise.
Any change in classification of cost which has a materials effect on the cost of the product
should be disclosed in the cost statements. Where the effect to such change is not ascertainable
wholly or partly the fact should be indicated in the cost statement.
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CAS 3: OVERHEADS
INTRODUCTION:
In Cost Accounting the analysis and collection overheads, their allocation and apportionment to
different cost centre and absorption to products or services plays an important role in
determination of cost well as control purposes. A system of better distribution of overheads can
only ensure greater accuracy in determination of cost of products or services. It is, therefore
necessary to follow standard practices for allocation; apportionment and absorption of overheads
for preparation of cost statements.
OBJECTIVE:
1. The standard is prescribe the method of collection, allocation, apportionment of overhead and
absorption thereof to products an absorption thereof to products or services on a consistent and
uniform basis in the preparation of cost statements and to facilitate inter-firm comparison.
2. The standardization of collection, allocation, apportionment and absorption of overheads is to
provide a scientific basis for determination of cost of different activities products, services, assets
etc.
3. The standard is to facilitate in taking commercial and strategic management decisions such as
resource allocation product mix optimization, make or buy decision, price fixation, etc.
4. The standard aims at ensuring better disclosure requirement and transparency in the cost
statement.
SCOPE:
The standard shall be applied in Cost and Management Accounting practices relating to
 Cost of products, services or activities
 Valuation of stock
 Transfer pricing
 Segment performance
 Excise & Custom duty, VAT, Income Tax, Service Tax and other levies, duties and
abatement fixation
 Cost statements for any other purpose.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Overheads: Overheads comprise of indirect materials, indirect employee costs and
indirect expenses which are not direct expenses which are not directly identifiable or
allocable to a cost object in a economically feasible way.
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2. Collection Of Overhead: Collection of overheads means the pooling of indirect items of
expenses from books of account and supportive / corroborative records in logical groups
business regards to their nature and purpose.
3. Allocation Of Overheads: allocation of overheads is assigning a whole items of cost
directly to a cost centre.
4. Apportionment of overhead: Apportionment of overheads to more than one cost centre
on some equitable basis.
5. Primary & Secondary Distribution Of Overheads: In case of multi-product
environment, there are common service cost centers which are providing services to the
various production cost centre and other service cost centre. The costs of services are
required to be apportioned to the relevant cost centers. First step to be followed is to
apportion the overheads to different cost centers and then second step is to apportion the
costs of service cost centers to production cost centre on an equitable basis. The first step
is termed as primary distribution and the second step is termed as secondary distribution
of overheads.
6. Absorption Of Overheads: Absorption of overheads is charging of overheads from cost
centers to products or services by means of absorption rate for each cost center.
7. Normal Capacity: Normal Capacity is the production achieved or achievable on an
average over a period or season under normal circumstances taking into account the loss
of capacity resulting from planned maintenance.
APPORTIONMENT OF OVERHEADS:
APPORTIONMENT OF PRODUCTION OVERHEADS:
Primary Distribution: Basis of apportionment must be rational to distribute overheads. Once
the base is selected the same is to be followed consistently and uniformly. However, change in
basis for apportionment can be adopted only when it is considered necessary due to change in
circumstances like change in technology, degree of mechanization product mix. Etc. In case of
such changes, proper disclosure in cost records is essential.
13
Examples of basis of primary distribution of some items of production overheads:
ITEMS OF COST BASIS OF APPORTIONMENT
Labour and Welfare Cost Number of Employees
Rent and Rates Floor and Space Area
Jigs, Tools and Fixtures Machine Hours or Man Hours
Depreciation Value of Fixed Asset
Secondary Distribution: Secondary distribution of overheads may be done by following either
Reciprocal basis or Non-Reciprocal basis. While reciprocal bass considers the exchange of
service among the service departments, non-reciprocal basis considers only one directional
service flow from a service cost centre to other production cost centers
APPORTIONMENT OF ADMINISTRATION OVERHEADS:
Administrative overheads included the following items of cost:
 Printing and stationery, other office supplies
 Employees cost – salaries of administrative staff
 Establishment expenses – Office rent & rates, insurance, depreciation of office building
and other assets, legal expenses, audit fees, bank charges, etc.
Administrative overheads are to be collected in different costs pools such as:
 General Office
 Personnel department
 Accounts department
 Legal department
 Secretarial department etc.
APPORTIONMENT OF SELLING AND DISTRIBUTION OVERHEADS:
The selling overheads and distribution overheads are collected under different cost pools such as:
Selling Overheads:
 Sales employees cost
 Rent
 Travelling expenses
 Warranty claim
 Brokerage & commission
 Advertisement relating to sales and sales promotion
 Sales incentive
 Bad debt, etc.
14
Distribution Overheads:
 Secondary Packaging
 Freight & Forwarding
 Warehousing & Storage
 Insurance, etc.
Some items of selling overheads and distribution overheads are directly identified and
absorbed to products or services and remaining part of selling and distribution overhead along
with the with share of administration overheads relating to selling and distribution activities are
to be apportioned to various products or jobs or services on the basis of net actual sales value
(i.e. Gross sales value less excise duty, sales tax and other government levies).
PRESENTATION AND DISCLOSURE:
Once the basis of collection, allocation, apportionment and absorption of different production
cost centers are selected, the same shall be followed consistently and uniformly.
Change in basis for collection, allocation apportionment and absorption can be adopted only
when it is compelled by the change in circumstances like change in technology, refinement and
improvement in the basis, etc. and the scientific approach. In case of such changes, proper
disclosure in cost records is essential.
Any changes in basis for collection, allocation, apportionment and absorption which has a
materials effect on the cost of the product should be disclosed in the cost statements.
Where the effect of such changes is not ascertainable wholly or partly, the fact should be
indicated in the cost statement.
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CAS 6: MATERIAL COST
INTRODUCTION:
This standard deals with principles and methods of determining material cost. Material for the
purpose of this standard includes raw material, process material, additives, manufactured/brought
out components, sub-assemblies, accessories, semi finished goods, consumable, stores, spares
and other indirect materials.
This statement deals with the principles and methods of classification, measurement and
assignment of material cost, for determination of the cost of product or service, and the
presentation and disclosure in cost statement.
OBJECTIVE;
The objective of this standard is to bring uniformity and consistency in the principles and method
of determining the material cost with reasonable accuracy.
SCOPE:
This statement should be applied to cost statements which require classification, measurement,
assignment, presentation and disclosure of material costs including those requiring attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Abnormal cost: An unusual or atypical cost whose occurrence is usually irregular and
unexpected and/ or due to some abnormal situation of the production or operation.
2. Administrative overheads: Expenses in the nature of indirect costs, incurred for general
management of an organization.
3. Cost Object: This includes a product, service, cost centre, activity, sub-activity, project,
contract, customer or distribution channel or any other unit in relation to which costs are
ascertained.
4. Defectives: End Product and/or intermediate product units that do not meet quality
standards. This may include reworks or rejects.
5. Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed only
for the purpose of the decision making.
6. Direct Materials: Materials the costs of which can be attributed to a cost object in an
economically feasible ways.
7. Indirect Materials: Materials, the costs of which cannot be directly attributed to a
particular cost object.
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8. Material Cost: The cost of material of any nature used for the purpose of production of a
product or a service.
9. Production overheads: Indirect costs involved in the production process or in rendering
service. The terms Production Overheads, Factory Overheads, Works Overheads and
Manufacturing Overheads denote the same meaning and are used interchangeably.
10. Scrap: Discarded material having some value in few cases and which is usually either
disposed of without further treatment (other than reclamation and handling) or
reintroduced into the production process in place of raw material.
11. Standard Cost: A predetermined norm applied as a scale of reference for assessing
actual cost, whether these are more or less.
12. Waste: Material loss during production or storage due to various factors such as
evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage, etc.,
and discarded material which may or may not have value.
13. Spoilage: Production that does not meet with dimensional or quality standards in such a
way that it cannot be rectified economically and is sold for a disposal value. Net Spoilage
is the difference between costs accumulated up to the point of rejection and the salvage
value.
PRINCIPLES OF MANAGEMENT:
1. Principle Of Valuation Of Receipt Of Material:
The material receipt should be valued at purchase price including duties and taxes, freight
inwards, insurance, and other expenditure directly attributable to procurement (net of
trade discounts, rebates, taxes and duties refundable or to be credited by the taxing
authorities) that can be quantified with reasonable accuracy at the time of acquisition.
Finance costs incurred in connection with the acquisition of materials shall not form part
of material cost.
Self manufactured materials shall be valued including direct material cost, direct
employee cost, direct expenses, factory overheads, share of administrative overheads
relating to production but excluding share of other administrative overheads, finance cost
and marketing overheads.
Spares which are specific to an item of equipment shall not be taken to inventory, but
shall be capitalized with the cost of the specific equipment. Cost of capital spares and/or
insurance spares, whether procured with the equipment or subsequently, shall be
amortised over a period, not exceeding the useful life of the equipment.
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Normal loss or spoilage of material prior to reaching the factory or at places where the
services are provided shall be absorbed in the cost of balance materials net of amounts
recoverable from suppliers, insurers, carriers or recoveries from disposal.
Subsidy/Grant/Incentive and any such payment received/receivable with respect to any
material shall be reduced from cost for ascertainment of the cost of the cost object to
which such amounts are related.
2. Principle Of Valuation Of Issue Of Material:
Issues shall be valued using appropriate assumptions on cost flow. E.g. First In First Out,
Last In First Out, Weighted Average Rate. The method of valuation shall be followed on
a consistent basis.
Where materials are accounted at standard cost, the price variances related to materials
shall be treated as part of material cost.
Any abnormal cost shall be excluded from the material cost.
Material cost may include imputed costs not considered in financial accounts. Such costs
which are not recognized in financial accounts may be determined by imputing a cost to
the usage or by measuring the benefit from an alternate use of the resource.
ASSIGNMENT OF COST:
Material costs shall be directly traced to a Cost object to the extent it is economically feasible
and /or shall be assigned to the cost object on the basis of material quantity consumed or similar
identifiable measure.
Where the material costs are not directly traceable to the cost object, these may be assigned on a
suitable basis like technical estimates.
The cost of indirect materials shall be assigned to the various Cost objects based on a suitable
basis such as actual usage or technical norms or a similar identifiable measure.
The cost of materials like catalysts, dies, tools, moulds, patterns etc, which are relatable to
production over a period of time, shall be amortized over the production units benefited by such
cost.
The cost of indirect material with life exceeding one year shall be included in cost over the
useful life of the material.
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PRESENTATION:
Direct Materials shall be classified in the cost statement under suitable heads. E.g.
 Raw materials,
 Components,
 Semi finished goods and
 Sub-assemblies
Indirect materials may be grouped under major heads like tools, stores and spares, machinery
spares, jigs and fixtures, consumable stores, etc., if they are significant.
DISCLOSURE:
The following information should be disclosed in the cost statements dealing with determination
of material cost.
 Quantity and rates of major items of materials shall be disclosed. Major items are defined
as those who form 5% of cost of materials.
 The basis of valuation of materials shall be disclosed.
 Any change in the cost accounting principles and methods applied for the determination
of the material cost during the period covered by the cost statement which has a material
effect on the cost of the material shall be disclosed. Where the effect of such change is
not ascertainable wholly or partly, the fact shall be indicated.
 Any abnormal cost excluded from the material cost shall be disclosed.
 Any demurrage or detention charges, penalty levied by transport or other authorities
excluded from the material cost shall be disclosed.
 Any Subsidy/Grant/Incentive or any such payment reduced from material cost shall be
disclosed.
 Cost of Materials procured from related parties shall be disclosed
 Any cost imputed in arriving at the material cost shall be disclosed.
 Disclosures shall be made only where significant, material and quantifiable.
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CAS 7: EMPLOYEE COST
INTRODUCTION:
This standard deals with the principles and methods of classification, measurement and
assignment of Employee cost, for determination of the Cost of product or service, and the
presentation and disclosure in cost statements.
OBJECTIVE:
The objective of this standard is to bring uniformity and consistency in the principles and
methods of determining the Employee cost with reasonable accuracy.
SCOPE:
This standard should be applied to cost statements which require classification, measurement,
assignment, presentation and disclosure of Employee cost including those requiring attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and
unexpected and/ or due to some abnormal situation of the production or operation.
2. Abnormal Idle Time: An unusual or atypical employee idle time occurrence of which is
usually irregular and unexpected or due to some abnormal situations.
E.g.: Idle time due to a strike, lockout or an accident.
3. Direct Employee Cost: The cost of employees which can be attributed to a Cost Object
in an economically feasible way.
4. Employee Cost: The aggregate of all kinds of consideration paid, payable and provisions
made for future payments for the services rendered by employees of an enterprise
(including temporary, part time and contract employees). Consideration includes wages,
salary, contractual payments and benefits, as applicable or any payment made on behalf
of employee. This is also known as Labour Cost.
5. Idle Time: The difference between the time for which the employees are paid and the
employee’s time booked against the cost object.
6. Indirect Employee Cost: The cost which cannot be directly attributed to a particular cost
object.
7. Marketing Overheads: Marketing Overheads are also known as Selling and Distribution
Overheads.
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8. Overtime Premium: Overtime is the time spent beyond the normal working hours which
is usually paid at a higher rate than the normal time rate. The extra amount beyond the
normal wages and salaries paid is called overtime premium.
9. Standard Cost: A predetermined cost of resource inputs for the cost object computed
with reference to set of technical specifications and efficient operating conditions.
Standard costs are used as scale of reference to compare the actual costs with the standard
cost with a view to determine the variances, if any, and analyse the causes of variances
and take proper measure to control them. Standard costs are also used for estimation.
PRINCIPLES OF MANAGEMENT:
1. Employee Cost shall be ascertained taking into account the gross pay including all
allowances payable along with the cost to the employer of all the benefits.
2. Bonus whether payable as a Statutory Minimum or on a sharing of surplus shall be
treated as part of employee cost. Ex gratia payable in lieu of or in addition to Bonus shall
also be treated as part of the employee cost.
3. Remuneration payable to Managerial Personnel including Executive Directors on the
Board and other officers of a corporate body under a statute will be considered as part of
the Employee Cost of the year under reference whether the whole or part of the
remuneration is computed as a percentage of profits.
4. Separation costs related to voluntary retirement, retrenchment, termination etc. shall be
amortised over the period benefitting from such costs.
5. Employee cost shall not include imputed costs.
6. Cost of Idle time is ascertained by the idle hours multiplied by the hourly rate applicable
to the idle employee or a group of employees.
7. Where Employee cost is accounted at standard cost, variances due to normal reasons
related to Employee cost shall be treated as part of Employee cost. Variances due to
abnormal reasons shall be treated as part of abnormal cost.
8. Any Subsidy, Grant, Incentive or any such payment received or receivable with respect to
any Employee cost shall be reduced for ascertainment of cost of the cost object to which
such amounts are related.
9. Any abnormal cost where it is material and quantifiable shall not form part of the
Employee cost.
10. Penalties, damages paid to statutory authorities or other third parties shall not form part
of the Employee cost.
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11. The cost of free housing, free conveyance and any other similar benefits provided to an
employee shall be determined at the total cost of all resources consumed in providing
such benefits.
12. Any recovery from the employee towards any benefit provided e.g. housing shall be
reduced from the employee cost.
ASSIGNMENT OF COST:
1. Where the Employee services are traceable to a cost object, such Employees’ cost shall
be assigned to the cost object on the basis such as time consumed or number of
employees engaged etc or similar identifiable measure.
2. While determining whether a particular Employee cost is chargeable to a separate cost
object, the principle of materiality shall be adhered to.
3. Where the Employee costs are not directly traceable to the cost object, these may be
assigned on suitable basis like estimates of time based on time study.
4. The amortised separation costs related to voluntary retirement, retrenchment, and
termination etc. for the period shall be treated as indirect cost and assigned to the cost
objects in an appropriate manner. However unamortised amount related to discontinue
operations, shall not be treated as employee cost.
5. Recruitment costs, training cost and other such costs shall be treated as overheads and
dealt with accordingly.
6. Overtime premium shall be assigned directly to the cost object or treated as overheads
depending on the economic feasibility and the specific circumstance requiring such
overtime.
7. Idle time cost shall be assigned direct to the cost object or treated as overheads depending
on the economic feasibility and the specific circumstances causing such idle time.
PRESENTATION:
Direct Employee costs shall be presented as a separate cost head in the cost statement.
Indirect Employee costs shall be presented in cost statements as a part of overheads relating to
respective functions e.g. manufacturing, administration, marketing etc.
The cost statement shall furnish the resources consumed on account of Employee cost, category
wise such as wages salaries to permanent, temporary, part time and contract employees piece rate
payments, overtime payments, Employee benefits (category wise)etc wherever such items form a
material part of the total Employee cost.
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DISCLOSURE:
The cost statements shall disclose the following:
 Employee cost attributable to capital works or jobs in the nature of deferred revenue
expenditure indicating the method followed in determining the cost of such capital work.
 Separation costs payable to employees.
 Any abnormal cost excluded from Employee cost.
 Penalties and damages paid etc excluded from Employee cost.
 Any Subsidy, Grant, Incentive and any such payment reduced from Employee cost
 The Employee cost paid to related parties.
 Employee cost incurred in foreign exchange.
Any change in the cost accounting principles and methods applied for the measurement and
assignment of the Employee Cost during the period covered by the cost statement which has a
material effect on the Employee Cost. Where the effect of such change is not ascertainable
wholly or partly the fact shall be indicated.
Disclosures shall be made only where material, significant and quantifiable.
Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate
schedule.
23
CAS 10: DIRECT EXPENSES
INTRODUCTION:
This standard deals with the principles and methods of classification, measurement and
assignment of Direct Expenses, for determination of the cost of product or service, and the
presentation and disclosure in cost statements.
OBJECTIVE:
The objective of this standard is to bring uniformity and consistency in the principles and
methods of determining the Direct Expenses with reasonable accuracy.
SCOPE:
This standard should be applied to cost statements, which require classification, measurement,
assignment, presentation and disclosure of Direct Expenses including those requiring attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and
unexpected and/ or due to some abnormal situation of the production or operation.
2. Cost Object: This includes a product, service, cost centre, activity, sub-activity, project,
contract, customer or distribution channel or any other unit in relation to which costs are
ascertained.
3. Direct Employee Cost: The cost of employees which can be attributed to a cost object in
an economically feasible way.
4. Direct Expenses: Expenses relating to manufacture of a product or rendering a service,
which can be identified or linked with the cost object other than direct material cost and
direct employee cost.
5. Finance Costs: Costs incurred by an enterprise in connection with the borrowing of
funds.
6. Direct Material Cost: The cost of material which can be attributed to a cost object in an
economically feasible way.
7. Standard Cost: A predetermined cost of resource inputs for the cost object computed
with reference to set of technical specifications and efficient operating conditions.
24
PRINCIPLES OF MEASUREMENT:
Identification of Direct Expenses shall be based on traceability in an economically feasible
manner.
Direct expenses incurred for the use of bought out resources shall be determined at invoice or
agreed price including duties and taxes, and other expenditure directly attributable thereto net of
trade discounts, rebates, taxes and duties refundable or to be credited.
Direct Expenses paid or incurred in lump-sum or which are in the nature of ‘one – time’
payment, shall be amortised on the basis of the estimated output or benefit to be derived from
such direct expenses.
If an item of Direct Expenses does not meet the test of materiality, it can be treated as part of
overheads.
Finance costs incurred in connection with the self generated or procured resources shall not form
part of Direct Expenses.
Where direct expenses are accounted at standard cost, variances due to normal reasons shall be
treated as part of the Direct Expenses. Variances due to abnormal reasons shall not form part of
the Direct Expenses.
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to any Direct
Expenses shall be reduced for ascertainment of the cost of the cost object to which such amounts
are related.
Any abnormal portion of the direct expenses where it is material and quantifiable shall not form
part of the Direct Expenses.
Credits/ recoveries relating to the Direct Expenses, material and quantifiable, shall be deducted
to arrive at the net Direct Expenses.
Any change in the cost accounting principles applied for the measurement of the
Direct Expenses should be made only if, it is required by law or for compliance with the
requirements of a cost accounting standard, or a change would result in a more appropriate
preparation or presentation of cost statements of an organisation.
25
ASSIGNMENT OF COST:
Direct Expenses that are directly traceable to the cost object shall be assigned to that cost object.
PRESENTATION:
Direct Expenses, if material, shall be presented as a separate cost head with suitable
classification. E.g.
 Subcontract charges
 Royalty on production
DISCLOSURE:
The cost statements shall disclose the following:
1. The basis of distribution of Direct Expenses to the cost objects/ cost units.
2. Quantity and rates of items of Direct Expenses, as applicable.
3. Where Direct Expenses are accounted at standard cost, the price and usage variances.
4. Direct expenses representing procurement of resources and expenses incurred in
connection with resources generated.
5. Direct Expenses paid/ payable to related parties.
6. Direct Expenses incurred in foreign exchange.
7. Any Subsidy/Grant/Incentive and any such payment reduced from Direct Expenses.
8. Credits/recoveries relating to the Direct Expenses.
9. Any abnormal portion of the Direct Expenses.
10. Penalties and damages excluded from the Direct Expenses
26
CAS 11: ADMINISTRATIVE OVERHEADS
INTRODUCTION:
This standard deals with the principles and methods of classification, measurement, and
assignment of administrative overheads, for determination of the cost of product or service, and
the presentation and disclosure in cost statement.
OBJECTIVE:
The objective of this standard is to bring uniformity and consistency in the principles and
methods determining the administrative overheads with reasonable accuracy.
SCOPE:
This standard should be applied to cost statement, which requires classification, measurement,
assignment, presentation and disclosure of administrative overheads including those requiring
attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and
unexpected and/ or due to some abnormal situation of the production or operation.
2. Absorption Of Overheads: Absorption of overheads is charging of overheads to Cost
Objects by means of appropriate absorption rate.
3. Administrative Overheads: Cost of all activities relating to general management and
administration of an organization. Administrative overheads shall exclude production
overheads, marketing overheads and finance cost.
4. Finance Cost: Costs incurred by an enterprise in connection with the borrowing of funds.
The term Finance costs and Borrowing costs are used interchangeably.
5. Normal Capacity: Normal capacity is the production achieved or achievable on an
average over a number of periods or seasons under normal circumstances taking into
account the loss of capacity resulting from planned maintenance.
6. Overheads: Overheads comprise of indirect material, indirect employee costs and
indirect expenses which are not directly identifiable or allocable to a cost object.
27
PRINCIPLES OF MEASUREMENT:
1. Administrative overheads shall be the aggregate of cost of resources consumed in
activities relating to general management and administration of an organization.
2. In case of leased assets, if the lease is an operating lease, the entire rentals shall be
included in the administrative overheads. If the lease is a financial lease, the finance cost
portion shall be segregated and treated as part of finance costs.
3. The cost of software (developed in house, purchased, licensed or customized), including
up-gradation cost shall be amortised over its estimated useful life.
4. The cost of administrative services procured from outside shall be determined at invoice
or agreed price including duties and taxes, and other expenditure directly attributable
thereto net of discounts (other than cash), taxes and duties refundable or to be credited.
5. Any Subsidy/Grant/Incentive or any amount of similar nature received/receivable with
respect to any administrative overheads shall be reduced for ascertainment of the cost of
the cost object to which such amounts are related.
ASSIGNMENT OF COSTS:
Assignment of administrative overheads to the cost object shall be based on either of the
following two principles:
 Cause and Effect – Cause is the process or operation or activity and effect is the
incurrence of cost.
 Benefits Received – Overheads are to be apportioned to the various cost objects in
proportion to the benefits received by them.
The cost of shared services should be assigned to user activities on the basis of actual usage.
PRESENTATION:
Administrative overheads shall be presented as a separate cost head in the cost statement.
Element wise details of the administrative overheads based on maturity shall be presented.
28
DISCLOSURE:
The cost statement shall disclose the following:
 The basis of assignment of administrative overheads to the cost objects.
 Any imputed cost included as a part of administrative overheads.
 Administrative overheads incurred in foreign exchange.
 Cost of administrative activities received from or supplied to related parties.
 Any Subsidy/Grant/Incentive or any amount of similar nature received/receivable
reduced from administrative overheads.
 Credits/recoveries relating to the administrative overheads.
 Any abnormal portion of the administrative overheads.
 Penalties and damages excluded from the administrative overheads.
29
CAS 14: POLLUTION CONTROL
INTRODUCTION:
This standard deals with principles and methods of determining the Pollution control costs. This
standard deals with the principles and methods of classification, measurement and assignment of
pollution control costs, for determination of Cost of product or service, and the presentation and
disclosure in cost statements.
OBJECTIVE:
The objective of this standard is to bring uniformity and consistency in the principles and
methods of determining the Pollution Control Costs with reasonable accuracy.
SCOPE:
This standard should to be applied to cost statements which require classification, measurement,
assignment, presentation and disclosure of Pollution Control Costs including those requiring
attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Air pollutant: Air Pollutant means any solid, liquid or gaseous substance (including
noise) present in the atmosphere in such concentration as may be or tend to be injurious
to human beings or other living creatures or plants or property or environment.
2. Air Pollution: Air pollution means the presence in the atmosphere of any air pollutant.
3. Environment: Environment includes water, air and land and the inter-relationship which
exists among and between water, air and land, and human beings, other living creatures,
plants, micro-organism and property.
4. Environmental Pollutant: Environmental Pollutant means any solid, liquid or gaseous
substance present in such concentration as may be, or tend to be, injurious to
environment.
5. Environment Pollution: Environmental pollution means the presence in the
environment of any environmental pollutant.
6. Pollution Control: Pollution Control means the control of emissions and effluents into
environment. It constitutes the use of materials, processes, or practices to reduce,
minimize, or eliminate the creation of pollutants or wastes. It includes practices that
reduce the use of toxic or hazardous materials, energy, water, and / or other resources.
30
7. Soil Pollutant: Soil Pollutant is a substance such as cadmium, copper, arsenic, mercury,
oil and organic solvent, which is the source of soil contamination.
8. Soil Pollution: Soil pollution means the presence of any soil pollutant(s) in the soil
which is harmful to the living beings when it crosses its threshold concentration level.
9. Water pollution: Pollution means such contamination of water or such alteration of the
physical, chemical or biological properties of water or such discharge of any sewage or
trade effluent or of any other liquid, gaseous or solid substance into water (whether
directly or indirectly) as may, or is likely to, create a nuisance or render such water
harmful or injurious to public health or safety, or to domestic, commercial, industrial,
agricultural or other legitimate uses, or to the life and health of animals or plants or of
aquatic organisms.
PRINCIPLES OF MEASUREMENT:
Pollution Control costs shall be the aggregate of direct and indirect cost relating to Pollution
Control activity.
Costs of Pollution Control which are internal to the entity should be accounted for when
incurred. They should be measured at the historical cost of resources consumed.
Future remediation or disposal costs which are expected to be incurred with reasonable certainty
as part of Onerous Contract or Constructive Obligation, legally enforceable shall be estimated
and accounted based on the quantum of pollution generated in each period and the associated
cost of remediation or disposal in future.
Contingent future remediation or disposal costs e.g. those likely to arise on account of future
legislative changes on pollution control shall not be treated as cost until the incidence of such
costs become reasonably certain and can be measured.
Cost of Pollution Control jobs carried out by contractor at its premises shall be determined at
invoice or agreed price including duties and taxes, and other expenditure directly attributable
thereto net of discounts (other than cash discount), taxes and duties refundable or to be credited.
This cost shall also include the cost of other resources provided to the contractors.
Cost of Pollution Control jobs carried out by outside contractors shall include charges made by
the contractor and cost of own materials, consumable stores, spares, manpower, equipment
usage, utilities and other costs used in such jobs.
Each type of Pollution Control e.g. water, air, soil pollution shall be treated as a distinct activity,
if material and identifiable.
Finance costs incurred in connection with the Pollution Control activities shall not form part of
Pollution Control costs.
31
ASSIGNMENT OF COST:
Where the Pollution Control cost is not directly traceable to cost object, it shall be treated as
overhead and assigned based on either of the following two principles;
 Cause and Effect - Cause is the process or operation or activity and effect is the
incurrence of cost.
 Benefits received – overheads are to be apportioned to the various cost objects in
proportion to the benefits received by them.
PRESENTATION:
Pollution control costs shall be presented duly classified as follows:
 Direct and Indirect cost
 Internal and External costs
 Current and future costs
 Domain area e.g. water, air and soil.
Activity wise details of Pollution Control cost, if material, shall be presented separately.
DISCLOSURE:
The cost statements shall disclose the following:
1. The basis of distribution of Pollution Control cost to the cost objects/ cost units.
2. Where standard cost is applied in Pollution Control cost, the price and usage variances.
3. Pollution Control cost of Jobs done in-house and outsourced separately.
4. Pollution Control cost paid/ payable to related parties.
5. Pollution Control cost incurred in foreign exchange.
6. Any Subsidy / Grant / Incentive or any amount of similar nature received / receivable
reduced from Pollution Control cost.
7. Any credits / recoveries relating to the Pollution Control cost.
8. Any abnormal portion of the Pollution Control cost.
9. Penalties and damages excluded from the Pollution Control cost.
32
CAS 18: RESEARCH AND DEVELOPMENT
INTRODUCTION:
This standard deals with the principles and methods of determining the Research, and
development costs and their classification, measurement and assignment for determination of the
cost of product or service, and the presentation and disclosure in cost statements.
OBJECTIVE:
The objective of this standard is to bring uniformity and consistency in the principles and
methods of determining the Research, and Development Costs with reasonable accuracy and
presentation of the same.
SCOPE:
This standard should be applied to cost statements that require classification, measurement,
assignment, presentation and disclosure of research and development costs including those
requiring attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Research: Research is original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.
2. Development: Development is the application of research findings or other knowledge to
a plan or design for the production of new or substantially improved materials, devices,
products, processes, systems or services prior to the commencement of commercial
production or use.
PRINCIPLES OF MEASUREMENT:
Research and Development costs shall include all the costs that are directly traceable to research
and/or development activities or that can be assigned to research and development activities
strictly on the basis of a) cause and effect or b) benefits received.
Subsidy / Grant / Incentive or amount of similar nature received / receivable with respect to
research and development activity, if any, shall be reduced from the cost of such research and
development activity.
Any abnormal cost where it is material and quantifiable shall not form part of the research and
development cost.
Fines, penalties, damages and similar levies paid to statutory authorities or other third parties
shall not form part of the research and development cost.
33
ASSIGNMENT OF COST:
 Research and Development costs attributable to a specific cost object shall be assigned to
that cost object directly.
 Development cost which results in the creation of an intangible asset shall be amortised
over its useful life.
 Assignment of Development Costs shall be based on the principle of “benefits received”.
 Research and Development Costs incurred for the development and improvement of an
existing process or product shall be included in the cost of production.
 Development costs attributable to a saleable service e.g. providing technical know-how to
outside parties shall be accumulated separately and treated as cost of providing the
service.
PRESENTATION:
Research and Development costs relating to improvement of the process or products or services
shall be presented as a separate item of cost in the cost statement under cost of production.
Research, and Development costs which are not related to improvement of the process, materials,
devices, processes, systems, product or services shall be presented as a part of the reconciliation
statement.
DISCLOSURE:
The cost statements shall disclose the following:
1. The basis of accumulation and assignment of Research and Development costs.
2. The Research and Development costs paid to related parties.
3. Credit/recoveries from related parties
4. Research and Development cost incurred in foreign exchange.
5. Credits/recoveries deducted from the research and development cost.
6. Any abnormal cost excluded from research and development cost including cost of
abandoned projects and research activities considered abnormal.
7. Penalties and damages paid etc. excluded from Research, and Development cost.
34
CAS 19: JOINT COST
INTRODUCTION:
The standard deals with the principles and methods of measurement and assignment of Joint
Costs and the presentation and disclosure in cost statement.
OBJECTIVE:
The objective of this standard is to bring uniformity, consistency in the principles, methods of
determining and assigning Joint Costs with reasonable accuracy.
SCOPE:
The standard shall be applied to cost statements which require classification, measurement,
assignment, presentation and disclosure of Joint Costs including those requiring attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Joint Costs: Joint costs are the cost of common resources used to produce two or more
products or services simultaneously.
2. Joint product: two or more products produced by the same process and separated in
processing, each having a sufficiently high saleable value to merit recognition as a main
product.
3. Scrap: Discarded material having some value in few cases and which is usually either
disposed of without further treatment (other than reclamation and handling) or
reintroduced into the production process in place of raw material.
4. Split off point: The point in the production process at which joint products become
separately identifiable. The terms split off point and separation point are used
interchangeably.
5. Waste: Material loss during production or storage due to various factors such as
evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage, etc. and
discarded material which may or may not have a value.
35
PRINCIPLES OF MEASUREMENT:
The principles and methods for measuring Joint costs upto the split off point will be the same as
stipulated in other cost accounting standards.
Cost incurred after split-off point on product separately identifiable shall be measured for the
resources consumed for each Joint/By-Product.
Cost incurred after split- off point for further processing of joint product/By-Product shall be the
aggregate of direct and indirect costs.
Cost of further processing of joint product/By-Product carried out by outside parties shall be
determined at invoice or agreed price including duties and taxes, net of discounts (other than
cash discount) taxes and duties refundable or to be credited and other expenditure directly
attributable to such processing . This cost shall also include the cost of resources provided to
outside parties.
In case the production process generates scrap or waste, realized or realizable value, net of
disposal cost, of scrap and waste shall be deducted from the cost of Joint Product.
Any Subsidy / Grant / Incentive or any such payment received / receivable with respect to any
joint product /By-Product shall be reduced for ascertainment of the cost to which such amounts
are related.
Penalties, damages paid to statutory authorities or other third parties shall not form part of the
cost of the joint product /By-Product.
ASSIGNMENT:
Joint cost incurred shall be assigned to joint products based on benefits received, which is
measured using any of the following methods:
a) Physical Units Method.
b) Net Realisable Value at split-off point.
c) Technical estimates.
The value of By-Product shall be estimated using any of the following methods for adjusting
joint costs:
a) Net realizable value.
b) Technical Estimates.
36
PRESENTATION:
The Cost Statement shall present the element wise cost of individual products produced jointly
and the value assigned to By-Products.
DISCLOSURE:
The Cost statement shall disclose the basis of allocation of Joint costs to individual products and
the value assigned to the by-products.
The Cost statement shall also disclose:
 The disclosure should be made only where material, significant & quantifiable.
 Disclosures shall be made in the body of Cost Statements or as a foot note or as a
separate schedule.
 Any change in the cost accounting principles and methods applied for the measurement
and assignment of the Joint costs and the value assigned to by-product during the period
covered by the cost statement which has a material effect on the Joint/
 By-Products shall be disclosed. Where the effect of such change is not ascertainable
wholly or partly the fact shall be indicated.
37
CAS 21: QUALITY CONTROL
INTRODUCTION:
The standard deals with the principles and methods of measurement and assignment of Quality
Control cost and the presentation and disclosure in cost statement.
OBJECTIVE:
The objective of this standard is to bring uniformity, consistency in the principles, methods of
determining and assigning Quality Control cost with reasonable accuracy.
SCOPE:
The standards shall be applied to cost statements which require classification, measurement,
assignment, presentation and disclosure of Quality Control cost including those requiring
attestation.
VARIOUS DEFINITIONS UNDER THE STANDARD:
1. Quality Control Cost: The difference between the actual cost of producing, selling and
supporting products or services and the equivalent costs if there were no failures during
production or usage. It is the total cost of quality related efforts and deficiencies.
2. Defectives: End Product and/or intermediate product units that do not meet quality
standards. This may include reworks or rejects.
3. Reworks: Defectives which can be brought up to the standards by putting in additional
resources.
4. Rejects: Defectives which cannot meet the quality standards even after putting in
additional resources.
5. Quality: Quality is the conformance to requirements or specifications. The quality of a
product or service is fitness of that product or service for meeting or exceeding its
intended use as required by customer.
6. Quality control cost: Quality Control cost is a system that is used to maintain a standard
level of quality in a product or service.
7. Scrap: Discarded material having some value in few cases and which is usually either
disposed of without further treatment (other than reclamation and handling) or
reintroduced into the production process in place of raw material.
38
8. Waste: Material loss during production or storage due to various factors such as
evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage, etc.,
and discarded material which may or may not have value.
9. Spoilage: Production that does not meet with dimensional or quality standards in such a
way that it cannot be rectified economically and is sold for a disposal value. Net Spoilage
is the difference between costs accumulated up to the point of rejection and the salvage
value.
PRINCIPLES OF MEASUREMENT:
Quality Control cost shall be the aggregate of the cost of resources consumed in the quality
control cost activities of the entity. The cost of resources procured from outside shall be
determined at invoice or agreed price including duties and taxes, and other expenditure directly
attributable thereto net of discounts (other than cash discounts), taxes and duties refundable or to
be credited by the Tax Authorities. Such cost shall include:
 Cost of conformance to quality: (a) prevention cost; and (b) appraisal cost.
 Cost of non-conformance to quality: (a) Cost of internal failure and (b) cost of external
failure.
Identification of Quality Control costs shall be based on traceability in an economically feasible
manner.
Any abnormal portion of the Quality Control cost where it is material and quantifiable shall not
form part of the Cost of Quality Control.
Penalties, damages paid to statutory authorities or other third parties shall not form part of the
Quality Control cost.
Finance costs incurred in connection with the self generated or procured resources shall not form
part of quality control cost.
Any change in the cost accounting principles applied for the measurement of the quality control
cost shall be made only if, it is required by law or for compliance with the requirements of a cost
accounting standard, or a change would result in a more appropriate preparation or presentation
of cost statements of an organisation.
39
ASSIGNMENT OF COST:
Quality Control cost that is directly traceable to the cost object shall be assigned to that cost
object.
Assignment of Quality Control cost to the cost objects shall be based on either of the following
two principles:
i. Cause and Effect - Cause is the process or operation or activity and effect is the Cost
incurrence of Quality Control cost.
ii. Benefits received – Quality Control cost is to be apportioned to the various cost objects in
proportion to the benefits received by them.
PREENTATION:
Quality Control cost, if material, shall be presented as a separate cost head with suitable
classification.
DISCLOSURE:
The cost statements shall disclose the following:
 The basis of distribution of Quality Control cost to the cost objects/ cost units.
 Quantity and Cost of resources used for Quality Control cost as applicable.
 Quality Control cost paid/ payable to related parties.
 Quality Control cost incurred in foreign exchange.
 Any abnormal portion of the Quality Control cost.
 Penalties and damages excluded from the Quality Control cost.
40
CONCLUSION:
Cost accounting and cost audit is a new order in presentation of cost statements to the
stakeholders. It provides a valuable service to the managements of companies in cost analysis
and control and increases the competitiveness of the Industrial units. The statement disclosed
should be helpful for improving the efficiency in the use of materials, labor and plant,
maximizing production and realizing greater profits. In a competitive environment, the Indian
industries should run in efficiently competing with internationally established Multinational
Companies.
There must be a complete shift for maintenance of cost accounting records by the corporate
sector from the existing rule/format based mechanism (backed by Cost Accounting Records
Rules notified by the Government for each industry separately) to a principle based mechanism
(that should be backed by the cost accounting standards and generally accepted cost accounting
principles & practices).
The government is considering a proposal to do away with the current system of calculating a
product’s cost through a fixed format, a move that will bring in flexibility and reduce compliance
costs for companies. The movement from a fixed format prescribed by the government towards
accounting standards, which is being termed as principle-based accounting, will give greater
flexibility to companies to treat different components of cost in an effective manner. A principle-
based system has a universal application and hence, maintenance of cost accounting records by
the corporate sector should be shifted from the existing rule or format-based mechanism to a
principle-based mechanism.
41
BIBLIOGRAPHY
1. Cost Accounting Standards – Cost Accounting Standards Board (CASB).
2. Cost Accounting Standards – Dr. B. Krishnamurthy’s Blog.
3. www.costmanagement.net.in.
4. www.costauditorindia.co.in.

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Project on Cost Accounting Standards.

  • 1. 1 CONTENT Sr. No. PARTICULARS Page No. INTRODUCTION 1 Cost Accounting Vs. Financial Accounting 2 2 Cost Accounting Standards 2 COST ACCOUNTING STANDARDS 1 CAS 1 Classification of Cost 5 2 CAS 3 Overheads 11 3 CAS 6 Material Cost 15 4 CAS 7 Employee Cost 19 5 CAS 10 Direct Expenses 23 6 CAS 11 Administrative Overheads 26 7 CAS 14 Pollution Control 29 8 CAS 18 Research and Development 32 9 CAS 19 Joint Cost 34 10 CAS 21 Quality Control 37 CONCLUSION 40 BIBLIOGRAPHY
  • 2. 2 Introduction: Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in financial accounting information, but its primary function is for use by managers to facilitate making decisions. Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization. All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities. Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions. In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes. Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, these "fixed costs" have become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.
  • 3. 3 COST ACCOUNTING VS FINANCIAL ACCOUNTING:  Financial accounting aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet. Cost Accounting aims at computing cost of production/service in a scientific manner and facilitates cost control and cost reduction.  Financial accounting reports the results and position of business to government, creditors, investors, and external parties.  Cost Accounting is an internal reporting system for an organization’s own management for decision making.  In financial accounting, cost classification based on type of transactions, e.g. salaries, repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization.  Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss for a period and Statement of financial position (Balance Sheet) on a given date. It aims at computing ‘true and fair’ view of the cost of production/services offered by the firm. COST ACCOUNTING STANDARDS: The Institute of Cost Accountants of India (ICAI), recognizing the need for structured approach to the measurement of cost in manufacture or service sector and to provide guidance to the user organizations, government bodies, regulators, research agencies and academic institutions to achieve uniformity and consistency in classification, measurement and assignment of cost to product and services, has constituted Cost Accounting Standards Board (CASB) in the year 2001 with the objective of formulating the Cost Accounting Standards (CASs). The structure of Cost Accounting Standard consists of Introduction, Objectives of issuing standards, Scope of standard, Definitions and explanations of the terms used in the standard, Principles of Measurement, Assignment of Cost, Presentation and Disclosure. The CASB has primarily identified 39 areas/items on which CASs are to be developed. The Council of the ICAI at its 251th Meeting held on 12–13 February 2009 and 258th Meeting held on 14 December 2009 decided on Mandatory application of Cost Accounting Standards (CASs). The CASs shall be mandatory with effect from period commencing on or after 1 April 2010 for being applied for the preparation and certification of General Purpose Cost Accounting Statements. So far ever 17 Cost Accounting Standards have been issued by the Institute.
  • 4. 4 List of CASs issued by ICAI till date are as follows: CAS-1 on Classification of Cost CAS-2 (Revised 2012) on Capacity Determination CAS-3 (Revised 2011) on Overheads CAS-4 on Cost of Production for Captive Consumption CAS-5 on Average (equalized) Cost of Transportation CAS-6 on Material Cost CAS-7 on Employee Cost CAS-8 on Cost of Utilities CAS-9 on Packing Material Cost CAS-10 on Direct Expenses CAS-11 on Administrative Overheads CAS-12 on Repairs and Maintenance Cost CAS-13 on Cost of Service Cost Centre CAS-14 on Pollution Control Cost CAS-15 on Selling & Distribution Overhead CAS-16 on Depreciation & Amortisation CAS-17 on Interest and Financing Charges CAS-18 on Research & Development Expenses CAS-19 on Joint Costs CAS-20 on Royalty and Technical Know-How Fee CAS-21 on Quality Control
  • 5. 5 CAS-1: CLASSIFICATION OF COST. INTRODUCTION: The standard on classification of costs deals with the basis of classification of costs and the practice to be adopted for classification of cost elements in regards to its nature and management objective. The statement aims at providing better understanding on classification of cost for preparation of various cost statements required for statutory obligations or cost control measures. OBJECTIVE: 1. The objective of this Standard is to prescribe the classification of costs for ascertainment of cost of a product or service and preparation of cost statements on a consistent and uniform basis with a view of effect the comparability of the same of an enterprise with that of previous period and of other enterprises. 2. The classification and its disclosure are aimed at providing better transparency in the cost statement. 3. The standard is also for better adoption of uniform Costing and Inter-firm Comparison. SCOPE: 1 The standard on Classification of cost should be applied in assessment of cost of a product or service, application of costing technique and in case of management decision making by the manufacturing industries in India. 2. The standard has also to be followed for the purpose of assessment of cost of production or valuation of stock to be certified for calculation of duties and taxes. Tariffs and other purpose as the case may be. The cost statement prepared based on standard will be used for assessment of excise duty and other taxes, antidumping measures, transfers pricing etc. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Cost: Cost is measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. 2. Cost Centre: Any unit of Cost Accounting selected with a view to accumulating all cost under that unit. The unit may be a product, a service, division, department, section, a group of plant and machinery, a group of employees or a combination of several units. This may also be a budget centre. 3. Cost Unit: Cost unit is a form of measurement of volume of production or service. This unit is generally adopted on the basis of convenience and practice in the industry concerned.
  • 6. 6 CLASSIFICATION OF COST: Classification of cost is the process of grouping the components of cost under a common designation on the basis of similarities of nature. It is the process of identification of each item together according to their common features. Items grouped together under common heads may be further classified according to their fundamental differences. The same costs may appear in several different classifications depending on the purpose of classification. Cost is classified normally in terms of a managerial objective. Its presentation normally requires sub-classification. Such sub-classification may be according to nature of the cost elements. Functional lines, areas of responsibility or some other useful break-up. The appropriate sub- classification depends upon the uses to be made of the cost report. Basis of Classification: i. By Nature Of Expenses: Cost should be gathered together in their natural groupings such as materials, labour and other expenses. Items of costs differ on the basis of their nature. The elements of cost can be classified in the following three categories: i) Material ii) Labour iii) Expenses COST MATERIAL LABOUR EXPENSES ii. By Relation Of Cost Center: Classification should be on the basis of method of allocation of cost to a cost unit. If expenditure can be allocated to a cost centre or cost object in an economically feasible way then it is called direct otherwise the cost component will be termed as indirect. According to this material cost is divided into direct material cost and indirect material cost, labour cost into direct labour cost and indirect labour cost and expenses into direct expenses and indirect expenses. Indirect costs are also known as “Overheads”. COST DIRECT INDIRECT MATERIAL LABOUR EXPENSES
  • 7. 7 iii.By Functions/Activities: Costs should be classified according to the major function for which the elements are used into the following four major functions:  Production;  Administration;  Research and Development;  Selling and Distribution. COST PRODUCTION ADMINISTRATION RESEARCH & DEVELOPMENT SELLING & DISTRIBUTION iv. By Behaviour: COST FIXED VARIABLE SEMI-VARIABLE Costs are classified based on behaviour as fixed cost, variable cost and semi-variable cost depending upon response to the changes in the activity levels. v. For Management Decision Making: Costs are classified for the purpose of management decision making under different circumstances as under:  Marginal Cost  Differential Cost  Opportunity Cost  Replacement Cost  Relevant Cost  Imputed Cost  Sunk Cost  Normal Cost  Abnormal Cost  Avoidable Cost  Unavoidable Cost
  • 9. 9 vi. By Nature Of Production Process: Costs are also classified on the basis of nature of production or manufacturing process. Cost can be classified as follows:  Batch Cost  Process Cost  Operating Cost  Contract Cost  Joint Cost  By-Product Cost COSTBATCH PROCESS OPERATING CONTRACT JOINT BY- PRODUCT
  • 10. 10 vii. Classification By Time: Cost item is related to a specific period of time and cost can be classified according to the system of assessment and specific purpose as indicate in the following ways:  Historical Cost  Pre-Determined Cost  Standard Cost  Estimated Cost COST HISTORICAL PRE-DETERMINED STANDARD ESTIMATED PRESENTATION AND DISCLOSURE: The classification of cost item should be done on ‘basis of classification’ chosen with pre- determined objective. The classification of cost item should be followed consistently from period to period and preparation of cost statements should be made with reference to a period time. A change in classification should be made only if it required by law or for compliance with a Cost Accounting Standard or the change would reset in a more appropriate preparation or presentation of cost statements of an enterprise. Any change in classification of cost which has a materials effect on the cost of the product should be disclosed in the cost statements. Where the effect to such change is not ascertainable wholly or partly the fact should be indicated in the cost statement.
  • 11. 11 CAS 3: OVERHEADS INTRODUCTION: In Cost Accounting the analysis and collection overheads, their allocation and apportionment to different cost centre and absorption to products or services plays an important role in determination of cost well as control purposes. A system of better distribution of overheads can only ensure greater accuracy in determination of cost of products or services. It is, therefore necessary to follow standard practices for allocation; apportionment and absorption of overheads for preparation of cost statements. OBJECTIVE: 1. The standard is prescribe the method of collection, allocation, apportionment of overhead and absorption thereof to products an absorption thereof to products or services on a consistent and uniform basis in the preparation of cost statements and to facilitate inter-firm comparison. 2. The standardization of collection, allocation, apportionment and absorption of overheads is to provide a scientific basis for determination of cost of different activities products, services, assets etc. 3. The standard is to facilitate in taking commercial and strategic management decisions such as resource allocation product mix optimization, make or buy decision, price fixation, etc. 4. The standard aims at ensuring better disclosure requirement and transparency in the cost statement. SCOPE: The standard shall be applied in Cost and Management Accounting practices relating to  Cost of products, services or activities  Valuation of stock  Transfer pricing  Segment performance  Excise & Custom duty, VAT, Income Tax, Service Tax and other levies, duties and abatement fixation  Cost statements for any other purpose. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Overheads: Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not direct expenses which are not directly identifiable or allocable to a cost object in a economically feasible way.
  • 12. 12 2. Collection Of Overhead: Collection of overheads means the pooling of indirect items of expenses from books of account and supportive / corroborative records in logical groups business regards to their nature and purpose. 3. Allocation Of Overheads: allocation of overheads is assigning a whole items of cost directly to a cost centre. 4. Apportionment of overhead: Apportionment of overheads to more than one cost centre on some equitable basis. 5. Primary & Secondary Distribution Of Overheads: In case of multi-product environment, there are common service cost centers which are providing services to the various production cost centre and other service cost centre. The costs of services are required to be apportioned to the relevant cost centers. First step to be followed is to apportion the overheads to different cost centers and then second step is to apportion the costs of service cost centers to production cost centre on an equitable basis. The first step is termed as primary distribution and the second step is termed as secondary distribution of overheads. 6. Absorption Of Overheads: Absorption of overheads is charging of overheads from cost centers to products or services by means of absorption rate for each cost center. 7. Normal Capacity: Normal Capacity is the production achieved or achievable on an average over a period or season under normal circumstances taking into account the loss of capacity resulting from planned maintenance. APPORTIONMENT OF OVERHEADS: APPORTIONMENT OF PRODUCTION OVERHEADS: Primary Distribution: Basis of apportionment must be rational to distribute overheads. Once the base is selected the same is to be followed consistently and uniformly. However, change in basis for apportionment can be adopted only when it is considered necessary due to change in circumstances like change in technology, degree of mechanization product mix. Etc. In case of such changes, proper disclosure in cost records is essential.
  • 13. 13 Examples of basis of primary distribution of some items of production overheads: ITEMS OF COST BASIS OF APPORTIONMENT Labour and Welfare Cost Number of Employees Rent and Rates Floor and Space Area Jigs, Tools and Fixtures Machine Hours or Man Hours Depreciation Value of Fixed Asset Secondary Distribution: Secondary distribution of overheads may be done by following either Reciprocal basis or Non-Reciprocal basis. While reciprocal bass considers the exchange of service among the service departments, non-reciprocal basis considers only one directional service flow from a service cost centre to other production cost centers APPORTIONMENT OF ADMINISTRATION OVERHEADS: Administrative overheads included the following items of cost:  Printing and stationery, other office supplies  Employees cost – salaries of administrative staff  Establishment expenses – Office rent & rates, insurance, depreciation of office building and other assets, legal expenses, audit fees, bank charges, etc. Administrative overheads are to be collected in different costs pools such as:  General Office  Personnel department  Accounts department  Legal department  Secretarial department etc. APPORTIONMENT OF SELLING AND DISTRIBUTION OVERHEADS: The selling overheads and distribution overheads are collected under different cost pools such as: Selling Overheads:  Sales employees cost  Rent  Travelling expenses  Warranty claim  Brokerage & commission  Advertisement relating to sales and sales promotion  Sales incentive  Bad debt, etc.
  • 14. 14 Distribution Overheads:  Secondary Packaging  Freight & Forwarding  Warehousing & Storage  Insurance, etc. Some items of selling overheads and distribution overheads are directly identified and absorbed to products or services and remaining part of selling and distribution overhead along with the with share of administration overheads relating to selling and distribution activities are to be apportioned to various products or jobs or services on the basis of net actual sales value (i.e. Gross sales value less excise duty, sales tax and other government levies). PRESENTATION AND DISCLOSURE: Once the basis of collection, allocation, apportionment and absorption of different production cost centers are selected, the same shall be followed consistently and uniformly. Change in basis for collection, allocation apportionment and absorption can be adopted only when it is compelled by the change in circumstances like change in technology, refinement and improvement in the basis, etc. and the scientific approach. In case of such changes, proper disclosure in cost records is essential. Any changes in basis for collection, allocation, apportionment and absorption which has a materials effect on the cost of the product should be disclosed in the cost statements. Where the effect of such changes is not ascertainable wholly or partly, the fact should be indicated in the cost statement.
  • 15. 15 CAS 6: MATERIAL COST INTRODUCTION: This standard deals with principles and methods of determining material cost. Material for the purpose of this standard includes raw material, process material, additives, manufactured/brought out components, sub-assemblies, accessories, semi finished goods, consumable, stores, spares and other indirect materials. This statement deals with the principles and methods of classification, measurement and assignment of material cost, for determination of the cost of product or service, and the presentation and disclosure in cost statement. OBJECTIVE; The objective of this standard is to bring uniformity and consistency in the principles and method of determining the material cost with reasonable accuracy. SCOPE: This statement should be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of material costs including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Abnormal cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/ or due to some abnormal situation of the production or operation. 2. Administrative overheads: Expenses in the nature of indirect costs, incurred for general management of an organization. 3. Cost Object: This includes a product, service, cost centre, activity, sub-activity, project, contract, customer or distribution channel or any other unit in relation to which costs are ascertained. 4. Defectives: End Product and/or intermediate product units that do not meet quality standards. This may include reworks or rejects. 5. Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed only for the purpose of the decision making. 6. Direct Materials: Materials the costs of which can be attributed to a cost object in an economically feasible ways. 7. Indirect Materials: Materials, the costs of which cannot be directly attributed to a particular cost object.
  • 16. 16 8. Material Cost: The cost of material of any nature used for the purpose of production of a product or a service. 9. Production overheads: Indirect costs involved in the production process or in rendering service. The terms Production Overheads, Factory Overheads, Works Overheads and Manufacturing Overheads denote the same meaning and are used interchangeably. 10. Scrap: Discarded material having some value in few cases and which is usually either disposed of without further treatment (other than reclamation and handling) or reintroduced into the production process in place of raw material. 11. Standard Cost: A predetermined norm applied as a scale of reference for assessing actual cost, whether these are more or less. 12. Waste: Material loss during production or storage due to various factors such as evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage, etc., and discarded material which may or may not have value. 13. Spoilage: Production that does not meet with dimensional or quality standards in such a way that it cannot be rectified economically and is sold for a disposal value. Net Spoilage is the difference between costs accumulated up to the point of rejection and the salvage value. PRINCIPLES OF MANAGEMENT: 1. Principle Of Valuation Of Receipt Of Material: The material receipt should be valued at purchase price including duties and taxes, freight inwards, insurance, and other expenditure directly attributable to procurement (net of trade discounts, rebates, taxes and duties refundable or to be credited by the taxing authorities) that can be quantified with reasonable accuracy at the time of acquisition. Finance costs incurred in connection with the acquisition of materials shall not form part of material cost. Self manufactured materials shall be valued including direct material cost, direct employee cost, direct expenses, factory overheads, share of administrative overheads relating to production but excluding share of other administrative overheads, finance cost and marketing overheads. Spares which are specific to an item of equipment shall not be taken to inventory, but shall be capitalized with the cost of the specific equipment. Cost of capital spares and/or insurance spares, whether procured with the equipment or subsequently, shall be amortised over a period, not exceeding the useful life of the equipment.
  • 17. 17 Normal loss or spoilage of material prior to reaching the factory or at places where the services are provided shall be absorbed in the cost of balance materials net of amounts recoverable from suppliers, insurers, carriers or recoveries from disposal. Subsidy/Grant/Incentive and any such payment received/receivable with respect to any material shall be reduced from cost for ascertainment of the cost of the cost object to which such amounts are related. 2. Principle Of Valuation Of Issue Of Material: Issues shall be valued using appropriate assumptions on cost flow. E.g. First In First Out, Last In First Out, Weighted Average Rate. The method of valuation shall be followed on a consistent basis. Where materials are accounted at standard cost, the price variances related to materials shall be treated as part of material cost. Any abnormal cost shall be excluded from the material cost. Material cost may include imputed costs not considered in financial accounts. Such costs which are not recognized in financial accounts may be determined by imputing a cost to the usage or by measuring the benefit from an alternate use of the resource. ASSIGNMENT OF COST: Material costs shall be directly traced to a Cost object to the extent it is economically feasible and /or shall be assigned to the cost object on the basis of material quantity consumed or similar identifiable measure. Where the material costs are not directly traceable to the cost object, these may be assigned on a suitable basis like technical estimates. The cost of indirect materials shall be assigned to the various Cost objects based on a suitable basis such as actual usage or technical norms or a similar identifiable measure. The cost of materials like catalysts, dies, tools, moulds, patterns etc, which are relatable to production over a period of time, shall be amortized over the production units benefited by such cost. The cost of indirect material with life exceeding one year shall be included in cost over the useful life of the material.
  • 18. 18 PRESENTATION: Direct Materials shall be classified in the cost statement under suitable heads. E.g.  Raw materials,  Components,  Semi finished goods and  Sub-assemblies Indirect materials may be grouped under major heads like tools, stores and spares, machinery spares, jigs and fixtures, consumable stores, etc., if they are significant. DISCLOSURE: The following information should be disclosed in the cost statements dealing with determination of material cost.  Quantity and rates of major items of materials shall be disclosed. Major items are defined as those who form 5% of cost of materials.  The basis of valuation of materials shall be disclosed.  Any change in the cost accounting principles and methods applied for the determination of the material cost during the period covered by the cost statement which has a material effect on the cost of the material shall be disclosed. Where the effect of such change is not ascertainable wholly or partly, the fact shall be indicated.  Any abnormal cost excluded from the material cost shall be disclosed.  Any demurrage or detention charges, penalty levied by transport or other authorities excluded from the material cost shall be disclosed.  Any Subsidy/Grant/Incentive or any such payment reduced from material cost shall be disclosed.  Cost of Materials procured from related parties shall be disclosed  Any cost imputed in arriving at the material cost shall be disclosed.  Disclosures shall be made only where significant, material and quantifiable.
  • 19. 19 CAS 7: EMPLOYEE COST INTRODUCTION: This standard deals with the principles and methods of classification, measurement and assignment of Employee cost, for determination of the Cost of product or service, and the presentation and disclosure in cost statements. OBJECTIVE: The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the Employee cost with reasonable accuracy. SCOPE: This standard should be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of Employee cost including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/ or due to some abnormal situation of the production or operation. 2. Abnormal Idle Time: An unusual or atypical employee idle time occurrence of which is usually irregular and unexpected or due to some abnormal situations. E.g.: Idle time due to a strike, lockout or an accident. 3. Direct Employee Cost: The cost of employees which can be attributed to a Cost Object in an economically feasible way. 4. Employee Cost: The aggregate of all kinds of consideration paid, payable and provisions made for future payments for the services rendered by employees of an enterprise (including temporary, part time and contract employees). Consideration includes wages, salary, contractual payments and benefits, as applicable or any payment made on behalf of employee. This is also known as Labour Cost. 5. Idle Time: The difference between the time for which the employees are paid and the employee’s time booked against the cost object. 6. Indirect Employee Cost: The cost which cannot be directly attributed to a particular cost object. 7. Marketing Overheads: Marketing Overheads are also known as Selling and Distribution Overheads.
  • 20. 20 8. Overtime Premium: Overtime is the time spent beyond the normal working hours which is usually paid at a higher rate than the normal time rate. The extra amount beyond the normal wages and salaries paid is called overtime premium. 9. Standard Cost: A predetermined cost of resource inputs for the cost object computed with reference to set of technical specifications and efficient operating conditions. Standard costs are used as scale of reference to compare the actual costs with the standard cost with a view to determine the variances, if any, and analyse the causes of variances and take proper measure to control them. Standard costs are also used for estimation. PRINCIPLES OF MANAGEMENT: 1. Employee Cost shall be ascertained taking into account the gross pay including all allowances payable along with the cost to the employer of all the benefits. 2. Bonus whether payable as a Statutory Minimum or on a sharing of surplus shall be treated as part of employee cost. Ex gratia payable in lieu of or in addition to Bonus shall also be treated as part of the employee cost. 3. Remuneration payable to Managerial Personnel including Executive Directors on the Board and other officers of a corporate body under a statute will be considered as part of the Employee Cost of the year under reference whether the whole or part of the remuneration is computed as a percentage of profits. 4. Separation costs related to voluntary retirement, retrenchment, termination etc. shall be amortised over the period benefitting from such costs. 5. Employee cost shall not include imputed costs. 6. Cost of Idle time is ascertained by the idle hours multiplied by the hourly rate applicable to the idle employee or a group of employees. 7. Where Employee cost is accounted at standard cost, variances due to normal reasons related to Employee cost shall be treated as part of Employee cost. Variances due to abnormal reasons shall be treated as part of abnormal cost. 8. Any Subsidy, Grant, Incentive or any such payment received or receivable with respect to any Employee cost shall be reduced for ascertainment of cost of the cost object to which such amounts are related. 9. Any abnormal cost where it is material and quantifiable shall not form part of the Employee cost. 10. Penalties, damages paid to statutory authorities or other third parties shall not form part of the Employee cost.
  • 21. 21 11. The cost of free housing, free conveyance and any other similar benefits provided to an employee shall be determined at the total cost of all resources consumed in providing such benefits. 12. Any recovery from the employee towards any benefit provided e.g. housing shall be reduced from the employee cost. ASSIGNMENT OF COST: 1. Where the Employee services are traceable to a cost object, such Employees’ cost shall be assigned to the cost object on the basis such as time consumed or number of employees engaged etc or similar identifiable measure. 2. While determining whether a particular Employee cost is chargeable to a separate cost object, the principle of materiality shall be adhered to. 3. Where the Employee costs are not directly traceable to the cost object, these may be assigned on suitable basis like estimates of time based on time study. 4. The amortised separation costs related to voluntary retirement, retrenchment, and termination etc. for the period shall be treated as indirect cost and assigned to the cost objects in an appropriate manner. However unamortised amount related to discontinue operations, shall not be treated as employee cost. 5. Recruitment costs, training cost and other such costs shall be treated as overheads and dealt with accordingly. 6. Overtime premium shall be assigned directly to the cost object or treated as overheads depending on the economic feasibility and the specific circumstance requiring such overtime. 7. Idle time cost shall be assigned direct to the cost object or treated as overheads depending on the economic feasibility and the specific circumstances causing such idle time. PRESENTATION: Direct Employee costs shall be presented as a separate cost head in the cost statement. Indirect Employee costs shall be presented in cost statements as a part of overheads relating to respective functions e.g. manufacturing, administration, marketing etc. The cost statement shall furnish the resources consumed on account of Employee cost, category wise such as wages salaries to permanent, temporary, part time and contract employees piece rate payments, overtime payments, Employee benefits (category wise)etc wherever such items form a material part of the total Employee cost.
  • 22. 22 DISCLOSURE: The cost statements shall disclose the following:  Employee cost attributable to capital works or jobs in the nature of deferred revenue expenditure indicating the method followed in determining the cost of such capital work.  Separation costs payable to employees.  Any abnormal cost excluded from Employee cost.  Penalties and damages paid etc excluded from Employee cost.  Any Subsidy, Grant, Incentive and any such payment reduced from Employee cost  The Employee cost paid to related parties.  Employee cost incurred in foreign exchange. Any change in the cost accounting principles and methods applied for the measurement and assignment of the Employee Cost during the period covered by the cost statement which has a material effect on the Employee Cost. Where the effect of such change is not ascertainable wholly or partly the fact shall be indicated. Disclosures shall be made only where material, significant and quantifiable. Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule.
  • 23. 23 CAS 10: DIRECT EXPENSES INTRODUCTION: This standard deals with the principles and methods of classification, measurement and assignment of Direct Expenses, for determination of the cost of product or service, and the presentation and disclosure in cost statements. OBJECTIVE: The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the Direct Expenses with reasonable accuracy. SCOPE: This standard should be applied to cost statements, which require classification, measurement, assignment, presentation and disclosure of Direct Expenses including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/ or due to some abnormal situation of the production or operation. 2. Cost Object: This includes a product, service, cost centre, activity, sub-activity, project, contract, customer or distribution channel or any other unit in relation to which costs are ascertained. 3. Direct Employee Cost: The cost of employees which can be attributed to a cost object in an economically feasible way. 4. Direct Expenses: Expenses relating to manufacture of a product or rendering a service, which can be identified or linked with the cost object other than direct material cost and direct employee cost. 5. Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. 6. Direct Material Cost: The cost of material which can be attributed to a cost object in an economically feasible way. 7. Standard Cost: A predetermined cost of resource inputs for the cost object computed with reference to set of technical specifications and efficient operating conditions.
  • 24. 24 PRINCIPLES OF MEASUREMENT: Identification of Direct Expenses shall be based on traceability in an economically feasible manner. Direct expenses incurred for the use of bought out resources shall be determined at invoice or agreed price including duties and taxes, and other expenditure directly attributable thereto net of trade discounts, rebates, taxes and duties refundable or to be credited. Direct Expenses paid or incurred in lump-sum or which are in the nature of ‘one – time’ payment, shall be amortised on the basis of the estimated output or benefit to be derived from such direct expenses. If an item of Direct Expenses does not meet the test of materiality, it can be treated as part of overheads. Finance costs incurred in connection with the self generated or procured resources shall not form part of Direct Expenses. Where direct expenses are accounted at standard cost, variances due to normal reasons shall be treated as part of the Direct Expenses. Variances due to abnormal reasons shall not form part of the Direct Expenses. Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to any Direct Expenses shall be reduced for ascertainment of the cost of the cost object to which such amounts are related. Any abnormal portion of the direct expenses where it is material and quantifiable shall not form part of the Direct Expenses. Credits/ recoveries relating to the Direct Expenses, material and quantifiable, shall be deducted to arrive at the net Direct Expenses. Any change in the cost accounting principles applied for the measurement of the Direct Expenses should be made only if, it is required by law or for compliance with the requirements of a cost accounting standard, or a change would result in a more appropriate preparation or presentation of cost statements of an organisation.
  • 25. 25 ASSIGNMENT OF COST: Direct Expenses that are directly traceable to the cost object shall be assigned to that cost object. PRESENTATION: Direct Expenses, if material, shall be presented as a separate cost head with suitable classification. E.g.  Subcontract charges  Royalty on production DISCLOSURE: The cost statements shall disclose the following: 1. The basis of distribution of Direct Expenses to the cost objects/ cost units. 2. Quantity and rates of items of Direct Expenses, as applicable. 3. Where Direct Expenses are accounted at standard cost, the price and usage variances. 4. Direct expenses representing procurement of resources and expenses incurred in connection with resources generated. 5. Direct Expenses paid/ payable to related parties. 6. Direct Expenses incurred in foreign exchange. 7. Any Subsidy/Grant/Incentive and any such payment reduced from Direct Expenses. 8. Credits/recoveries relating to the Direct Expenses. 9. Any abnormal portion of the Direct Expenses. 10. Penalties and damages excluded from the Direct Expenses
  • 26. 26 CAS 11: ADMINISTRATIVE OVERHEADS INTRODUCTION: This standard deals with the principles and methods of classification, measurement, and assignment of administrative overheads, for determination of the cost of product or service, and the presentation and disclosure in cost statement. OBJECTIVE: The objective of this standard is to bring uniformity and consistency in the principles and methods determining the administrative overheads with reasonable accuracy. SCOPE: This standard should be applied to cost statement, which requires classification, measurement, assignment, presentation and disclosure of administrative overheads including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/ or due to some abnormal situation of the production or operation. 2. Absorption Of Overheads: Absorption of overheads is charging of overheads to Cost Objects by means of appropriate absorption rate. 3. Administrative Overheads: Cost of all activities relating to general management and administration of an organization. Administrative overheads shall exclude production overheads, marketing overheads and finance cost. 4. Finance Cost: Costs incurred by an enterprise in connection with the borrowing of funds. The term Finance costs and Borrowing costs are used interchangeably. 5. Normal Capacity: Normal capacity is the production achieved or achievable on an average over a number of periods or seasons under normal circumstances taking into account the loss of capacity resulting from planned maintenance. 6. Overheads: Overheads comprise of indirect material, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object.
  • 27. 27 PRINCIPLES OF MEASUREMENT: 1. Administrative overheads shall be the aggregate of cost of resources consumed in activities relating to general management and administration of an organization. 2. In case of leased assets, if the lease is an operating lease, the entire rentals shall be included in the administrative overheads. If the lease is a financial lease, the finance cost portion shall be segregated and treated as part of finance costs. 3. The cost of software (developed in house, purchased, licensed or customized), including up-gradation cost shall be amortised over its estimated useful life. 4. The cost of administrative services procured from outside shall be determined at invoice or agreed price including duties and taxes, and other expenditure directly attributable thereto net of discounts (other than cash), taxes and duties refundable or to be credited. 5. Any Subsidy/Grant/Incentive or any amount of similar nature received/receivable with respect to any administrative overheads shall be reduced for ascertainment of the cost of the cost object to which such amounts are related. ASSIGNMENT OF COSTS: Assignment of administrative overheads to the cost object shall be based on either of the following two principles:  Cause and Effect – Cause is the process or operation or activity and effect is the incurrence of cost.  Benefits Received – Overheads are to be apportioned to the various cost objects in proportion to the benefits received by them. The cost of shared services should be assigned to user activities on the basis of actual usage. PRESENTATION: Administrative overheads shall be presented as a separate cost head in the cost statement. Element wise details of the administrative overheads based on maturity shall be presented.
  • 28. 28 DISCLOSURE: The cost statement shall disclose the following:  The basis of assignment of administrative overheads to the cost objects.  Any imputed cost included as a part of administrative overheads.  Administrative overheads incurred in foreign exchange.  Cost of administrative activities received from or supplied to related parties.  Any Subsidy/Grant/Incentive or any amount of similar nature received/receivable reduced from administrative overheads.  Credits/recoveries relating to the administrative overheads.  Any abnormal portion of the administrative overheads.  Penalties and damages excluded from the administrative overheads.
  • 29. 29 CAS 14: POLLUTION CONTROL INTRODUCTION: This standard deals with principles and methods of determining the Pollution control costs. This standard deals with the principles and methods of classification, measurement and assignment of pollution control costs, for determination of Cost of product or service, and the presentation and disclosure in cost statements. OBJECTIVE: The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the Pollution Control Costs with reasonable accuracy. SCOPE: This standard should to be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of Pollution Control Costs including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Air pollutant: Air Pollutant means any solid, liquid or gaseous substance (including noise) present in the atmosphere in such concentration as may be or tend to be injurious to human beings or other living creatures or plants or property or environment. 2. Air Pollution: Air pollution means the presence in the atmosphere of any air pollutant. 3. Environment: Environment includes water, air and land and the inter-relationship which exists among and between water, air and land, and human beings, other living creatures, plants, micro-organism and property. 4. Environmental Pollutant: Environmental Pollutant means any solid, liquid or gaseous substance present in such concentration as may be, or tend to be, injurious to environment. 5. Environment Pollution: Environmental pollution means the presence in the environment of any environmental pollutant. 6. Pollution Control: Pollution Control means the control of emissions and effluents into environment. It constitutes the use of materials, processes, or practices to reduce, minimize, or eliminate the creation of pollutants or wastes. It includes practices that reduce the use of toxic or hazardous materials, energy, water, and / or other resources.
  • 30. 30 7. Soil Pollutant: Soil Pollutant is a substance such as cadmium, copper, arsenic, mercury, oil and organic solvent, which is the source of soil contamination. 8. Soil Pollution: Soil pollution means the presence of any soil pollutant(s) in the soil which is harmful to the living beings when it crosses its threshold concentration level. 9. Water pollution: Pollution means such contamination of water or such alteration of the physical, chemical or biological properties of water or such discharge of any sewage or trade effluent or of any other liquid, gaseous or solid substance into water (whether directly or indirectly) as may, or is likely to, create a nuisance or render such water harmful or injurious to public health or safety, or to domestic, commercial, industrial, agricultural or other legitimate uses, or to the life and health of animals or plants or of aquatic organisms. PRINCIPLES OF MEASUREMENT: Pollution Control costs shall be the aggregate of direct and indirect cost relating to Pollution Control activity. Costs of Pollution Control which are internal to the entity should be accounted for when incurred. They should be measured at the historical cost of resources consumed. Future remediation or disposal costs which are expected to be incurred with reasonable certainty as part of Onerous Contract or Constructive Obligation, legally enforceable shall be estimated and accounted based on the quantum of pollution generated in each period and the associated cost of remediation or disposal in future. Contingent future remediation or disposal costs e.g. those likely to arise on account of future legislative changes on pollution control shall not be treated as cost until the incidence of such costs become reasonably certain and can be measured. Cost of Pollution Control jobs carried out by contractor at its premises shall be determined at invoice or agreed price including duties and taxes, and other expenditure directly attributable thereto net of discounts (other than cash discount), taxes and duties refundable or to be credited. This cost shall also include the cost of other resources provided to the contractors. Cost of Pollution Control jobs carried out by outside contractors shall include charges made by the contractor and cost of own materials, consumable stores, spares, manpower, equipment usage, utilities and other costs used in such jobs. Each type of Pollution Control e.g. water, air, soil pollution shall be treated as a distinct activity, if material and identifiable. Finance costs incurred in connection with the Pollution Control activities shall not form part of Pollution Control costs.
  • 31. 31 ASSIGNMENT OF COST: Where the Pollution Control cost is not directly traceable to cost object, it shall be treated as overhead and assigned based on either of the following two principles;  Cause and Effect - Cause is the process or operation or activity and effect is the incurrence of cost.  Benefits received – overheads are to be apportioned to the various cost objects in proportion to the benefits received by them. PRESENTATION: Pollution control costs shall be presented duly classified as follows:  Direct and Indirect cost  Internal and External costs  Current and future costs  Domain area e.g. water, air and soil. Activity wise details of Pollution Control cost, if material, shall be presented separately. DISCLOSURE: The cost statements shall disclose the following: 1. The basis of distribution of Pollution Control cost to the cost objects/ cost units. 2. Where standard cost is applied in Pollution Control cost, the price and usage variances. 3. Pollution Control cost of Jobs done in-house and outsourced separately. 4. Pollution Control cost paid/ payable to related parties. 5. Pollution Control cost incurred in foreign exchange. 6. Any Subsidy / Grant / Incentive or any amount of similar nature received / receivable reduced from Pollution Control cost. 7. Any credits / recoveries relating to the Pollution Control cost. 8. Any abnormal portion of the Pollution Control cost. 9. Penalties and damages excluded from the Pollution Control cost.
  • 32. 32 CAS 18: RESEARCH AND DEVELOPMENT INTRODUCTION: This standard deals with the principles and methods of determining the Research, and development costs and their classification, measurement and assignment for determination of the cost of product or service, and the presentation and disclosure in cost statements. OBJECTIVE: The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the Research, and Development Costs with reasonable accuracy and presentation of the same. SCOPE: This standard should be applied to cost statements that require classification, measurement, assignment, presentation and disclosure of research and development costs including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Research: Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. 2. Development: Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use. PRINCIPLES OF MEASUREMENT: Research and Development costs shall include all the costs that are directly traceable to research and/or development activities or that can be assigned to research and development activities strictly on the basis of a) cause and effect or b) benefits received. Subsidy / Grant / Incentive or amount of similar nature received / receivable with respect to research and development activity, if any, shall be reduced from the cost of such research and development activity. Any abnormal cost where it is material and quantifiable shall not form part of the research and development cost. Fines, penalties, damages and similar levies paid to statutory authorities or other third parties shall not form part of the research and development cost.
  • 33. 33 ASSIGNMENT OF COST:  Research and Development costs attributable to a specific cost object shall be assigned to that cost object directly.  Development cost which results in the creation of an intangible asset shall be amortised over its useful life.  Assignment of Development Costs shall be based on the principle of “benefits received”.  Research and Development Costs incurred for the development and improvement of an existing process or product shall be included in the cost of production.  Development costs attributable to a saleable service e.g. providing technical know-how to outside parties shall be accumulated separately and treated as cost of providing the service. PRESENTATION: Research and Development costs relating to improvement of the process or products or services shall be presented as a separate item of cost in the cost statement under cost of production. Research, and Development costs which are not related to improvement of the process, materials, devices, processes, systems, product or services shall be presented as a part of the reconciliation statement. DISCLOSURE: The cost statements shall disclose the following: 1. The basis of accumulation and assignment of Research and Development costs. 2. The Research and Development costs paid to related parties. 3. Credit/recoveries from related parties 4. Research and Development cost incurred in foreign exchange. 5. Credits/recoveries deducted from the research and development cost. 6. Any abnormal cost excluded from research and development cost including cost of abandoned projects and research activities considered abnormal. 7. Penalties and damages paid etc. excluded from Research, and Development cost.
  • 34. 34 CAS 19: JOINT COST INTRODUCTION: The standard deals with the principles and methods of measurement and assignment of Joint Costs and the presentation and disclosure in cost statement. OBJECTIVE: The objective of this standard is to bring uniformity, consistency in the principles, methods of determining and assigning Joint Costs with reasonable accuracy. SCOPE: The standard shall be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of Joint Costs including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Joint Costs: Joint costs are the cost of common resources used to produce two or more products or services simultaneously. 2. Joint product: two or more products produced by the same process and separated in processing, each having a sufficiently high saleable value to merit recognition as a main product. 3. Scrap: Discarded material having some value in few cases and which is usually either disposed of without further treatment (other than reclamation and handling) or reintroduced into the production process in place of raw material. 4. Split off point: The point in the production process at which joint products become separately identifiable. The terms split off point and separation point are used interchangeably. 5. Waste: Material loss during production or storage due to various factors such as evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage, etc. and discarded material which may or may not have a value.
  • 35. 35 PRINCIPLES OF MEASUREMENT: The principles and methods for measuring Joint costs upto the split off point will be the same as stipulated in other cost accounting standards. Cost incurred after split-off point on product separately identifiable shall be measured for the resources consumed for each Joint/By-Product. Cost incurred after split- off point for further processing of joint product/By-Product shall be the aggregate of direct and indirect costs. Cost of further processing of joint product/By-Product carried out by outside parties shall be determined at invoice or agreed price including duties and taxes, net of discounts (other than cash discount) taxes and duties refundable or to be credited and other expenditure directly attributable to such processing . This cost shall also include the cost of resources provided to outside parties. In case the production process generates scrap or waste, realized or realizable value, net of disposal cost, of scrap and waste shall be deducted from the cost of Joint Product. Any Subsidy / Grant / Incentive or any such payment received / receivable with respect to any joint product /By-Product shall be reduced for ascertainment of the cost to which such amounts are related. Penalties, damages paid to statutory authorities or other third parties shall not form part of the cost of the joint product /By-Product. ASSIGNMENT: Joint cost incurred shall be assigned to joint products based on benefits received, which is measured using any of the following methods: a) Physical Units Method. b) Net Realisable Value at split-off point. c) Technical estimates. The value of By-Product shall be estimated using any of the following methods for adjusting joint costs: a) Net realizable value. b) Technical Estimates.
  • 36. 36 PRESENTATION: The Cost Statement shall present the element wise cost of individual products produced jointly and the value assigned to By-Products. DISCLOSURE: The Cost statement shall disclose the basis of allocation of Joint costs to individual products and the value assigned to the by-products. The Cost statement shall also disclose:  The disclosure should be made only where material, significant & quantifiable.  Disclosures shall be made in the body of Cost Statements or as a foot note or as a separate schedule.  Any change in the cost accounting principles and methods applied for the measurement and assignment of the Joint costs and the value assigned to by-product during the period covered by the cost statement which has a material effect on the Joint/  By-Products shall be disclosed. Where the effect of such change is not ascertainable wholly or partly the fact shall be indicated.
  • 37. 37 CAS 21: QUALITY CONTROL INTRODUCTION: The standard deals with the principles and methods of measurement and assignment of Quality Control cost and the presentation and disclosure in cost statement. OBJECTIVE: The objective of this standard is to bring uniformity, consistency in the principles, methods of determining and assigning Quality Control cost with reasonable accuracy. SCOPE: The standards shall be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of Quality Control cost including those requiring attestation. VARIOUS DEFINITIONS UNDER THE STANDARD: 1. Quality Control Cost: The difference between the actual cost of producing, selling and supporting products or services and the equivalent costs if there were no failures during production or usage. It is the total cost of quality related efforts and deficiencies. 2. Defectives: End Product and/or intermediate product units that do not meet quality standards. This may include reworks or rejects. 3. Reworks: Defectives which can be brought up to the standards by putting in additional resources. 4. Rejects: Defectives which cannot meet the quality standards even after putting in additional resources. 5. Quality: Quality is the conformance to requirements or specifications. The quality of a product or service is fitness of that product or service for meeting or exceeding its intended use as required by customer. 6. Quality control cost: Quality Control cost is a system that is used to maintain a standard level of quality in a product or service. 7. Scrap: Discarded material having some value in few cases and which is usually either disposed of without further treatment (other than reclamation and handling) or reintroduced into the production process in place of raw material.
  • 38. 38 8. Waste: Material loss during production or storage due to various factors such as evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage, etc., and discarded material which may or may not have value. 9. Spoilage: Production that does not meet with dimensional or quality standards in such a way that it cannot be rectified economically and is sold for a disposal value. Net Spoilage is the difference between costs accumulated up to the point of rejection and the salvage value. PRINCIPLES OF MEASUREMENT: Quality Control cost shall be the aggregate of the cost of resources consumed in the quality control cost activities of the entity. The cost of resources procured from outside shall be determined at invoice or agreed price including duties and taxes, and other expenditure directly attributable thereto net of discounts (other than cash discounts), taxes and duties refundable or to be credited by the Tax Authorities. Such cost shall include:  Cost of conformance to quality: (a) prevention cost; and (b) appraisal cost.  Cost of non-conformance to quality: (a) Cost of internal failure and (b) cost of external failure. Identification of Quality Control costs shall be based on traceability in an economically feasible manner. Any abnormal portion of the Quality Control cost where it is material and quantifiable shall not form part of the Cost of Quality Control. Penalties, damages paid to statutory authorities or other third parties shall not form part of the Quality Control cost. Finance costs incurred in connection with the self generated or procured resources shall not form part of quality control cost. Any change in the cost accounting principles applied for the measurement of the quality control cost shall be made only if, it is required by law or for compliance with the requirements of a cost accounting standard, or a change would result in a more appropriate preparation or presentation of cost statements of an organisation.
  • 39. 39 ASSIGNMENT OF COST: Quality Control cost that is directly traceable to the cost object shall be assigned to that cost object. Assignment of Quality Control cost to the cost objects shall be based on either of the following two principles: i. Cause and Effect - Cause is the process or operation or activity and effect is the Cost incurrence of Quality Control cost. ii. Benefits received – Quality Control cost is to be apportioned to the various cost objects in proportion to the benefits received by them. PREENTATION: Quality Control cost, if material, shall be presented as a separate cost head with suitable classification. DISCLOSURE: The cost statements shall disclose the following:  The basis of distribution of Quality Control cost to the cost objects/ cost units.  Quantity and Cost of resources used for Quality Control cost as applicable.  Quality Control cost paid/ payable to related parties.  Quality Control cost incurred in foreign exchange.  Any abnormal portion of the Quality Control cost.  Penalties and damages excluded from the Quality Control cost.
  • 40. 40 CONCLUSION: Cost accounting and cost audit is a new order in presentation of cost statements to the stakeholders. It provides a valuable service to the managements of companies in cost analysis and control and increases the competitiveness of the Industrial units. The statement disclosed should be helpful for improving the efficiency in the use of materials, labor and plant, maximizing production and realizing greater profits. In a competitive environment, the Indian industries should run in efficiently competing with internationally established Multinational Companies. There must be a complete shift for maintenance of cost accounting records by the corporate sector from the existing rule/format based mechanism (backed by Cost Accounting Records Rules notified by the Government for each industry separately) to a principle based mechanism (that should be backed by the cost accounting standards and generally accepted cost accounting principles & practices). The government is considering a proposal to do away with the current system of calculating a product’s cost through a fixed format, a move that will bring in flexibility and reduce compliance costs for companies. The movement from a fixed format prescribed by the government towards accounting standards, which is being termed as principle-based accounting, will give greater flexibility to companies to treat different components of cost in an effective manner. A principle- based system has a universal application and hence, maintenance of cost accounting records by the corporate sector should be shifted from the existing rule or format-based mechanism to a principle-based mechanism.
  • 41. 41 BIBLIOGRAPHY 1. Cost Accounting Standards – Cost Accounting Standards Board (CASB). 2. Cost Accounting Standards – Dr. B. Krishnamurthy’s Blog. 3. www.costmanagement.net.in. 4. www.costauditorindia.co.in.